What's new

Debate hosted by the Union of Entrepreneurs and Employers: Emission allowances trading, price bubbles and energy prices

Warsaw, 16th September 2021


Debate hosted by the Union of Entrepreneurs and Employers: Emission allowances trading, price bubbles and energy prices


The European Emissions Trading Scheme cannot be considered as operating in accordance with the idea of a free market. The foundations of its operation artificially limit the supply of allowances. On the demand side, financial investors are free to take advantage of the fact that part of the buyers of EUA require them to run a business operations. The allowances have no price cap, as the penalty for emission without allowances does not release the allowance from the obligation to settle it. The conducted analysis suggests that price bubbles are emerging on the EUA market. These are the key conclusions of the report written by Marek Lachowicz and published by the Union of Entrepreneurs and Employers “EUA: Price bubbles and the competitiveness of Poland and the European Union”.

“The withdrawal of energy-intensive companies and the limited access to raw materials related to this phenomenon both pose a serious threat for the entire EU. At this point, we are optimistic and think in globalist terms about imports of raw materials. However, as the COVID-19 pandemic has shown us: in the event of an emergency, countries secures raw material supplies primarily for itself. Extending the ETS to aviation and maritime transport will make it more difficult to transport raw materials to the EU. So his is not even a shot to the knee, but actually to the pelvis. We should also remember that the transport of raw materials from abroad may offset any emission reductions that we achieve thanks to the ETS,” stresses Marek Lachowicz, economist and author of the report.

EUA prices have “bubble-genic” characteristics. Their changes over time are similar to those of the Brent crude oil and natural gas futures contracts. However, there is no long-term link between EUA prices and either the price of Brent crude oil or the GDP. This suggests that financial investors treat emission allowances as a class of speculative assets similar to crude oil.

The creation of price bubbles on emission allowances favours the relocation of energy-intensive enterprises outside the borders of the European Union. These companies often supply key raw materials, such as steel, which are the foundation for the competitiveness of EU industry. The possibility of a bubble emerging forces EUA mechanisms to set up reserves to offset increases in allowance prices, which significantly reduces the pool of available financial resources that could be allocated, for instance, to emission reduction technologies. The unpredictability of allowance prices also prevents real investment planning in the entire energy sector.

The President of the Jagiellonian Institute – one of Polish major think tanks, Marcin Roszkowski, looked at the issue at hand from a slightly different perspective: “The ETS is primarily a political instrument aimed at getting rid of the entire coal and gas industry in the energy sector and, as a result, focused on economic transformation. However, we cannot speak of a bubble in the emissions trading market, because political instruments do not create such bubbles.”

The COVID-19 pandemic has shown the fragility of value chains being based on imports of essential raw materials and semi-finished products. In the event of an international crisis, the Union’s potential technological advantage will be meaningless unless it is backed by the raw materials it required. The changes to the EU ETS system planned in the “Fit for 55” package do not solve the problem at hand, but worsen it. Reducing the number of free allowances for aviation as well as extending this system to maritime transport are a threat to the competitiveness of the Union as a whole. The possible consequences of the reforms proposed by the European Commission include an increase in the prices of goods imported to the EU, which might in turn lead to customs wars, especially should a carbon border tax be introduced

“The Commission’s argument in favour of the necessity to extend the ETS is its effectiveness. Yet, a number of ex-post studies have shown that the annual reduction in emissions achieved by the system ranges between 0.5-1%. Considering the huge costs for society and the low gains in emissions’ reductions, it seems essential to consider whether we should actually base – to a large extent – the EU energy transformation on this very instrument, combined with the equally dubious carbon adjustment mechanism, or not,” concludes Kamila Sotomska, Deputy Director of the Law and Legislation Department at the Union of Entrepreneurs and Employers.


See more: EUA: Price bubbles vs the competitiveness of Poland and the European Union – report by the Union of Entrepreneurs and Employers

For members of the ZPP

Our websites

Subscribe to our newsletter